Pick the Unlucky Bank

• Report this Comment On April 27, 2009, at 4:08 PM, georule wrote:

  I've got a serious problem with this article. . .to the point of thinking it even potentially irresponsible. The reason is, it has been well publicized that *19* banks were stress-tested, and yet, suspiciously, only the six largest are listed here. Do they also have the six lowest TCE's? No way for me to tell from this article. If they do have the 6 lowest TCEs of the 19, then fine I withdraw my "irresponsible" comment. If one of more of the other 13 are lower than JP Morgan then I don't.

• Report this Comment On April 27, 2009, at 4:17 PM, ZZyzxZZ wrote:

  Someone please educate me because I don't understand how the common equity of a company has anything to do with the financial health of that company.

  When a company issues common stock it now has it's hands on new money and I can see how that does affect the company. But when it converts preferred shares to common shares, how does that affect the company? All I can see is that it reduces it's obligations to pay a dividend on the preferred. Of course it dilutes the other common shareholders, but from a company outlook, so what?

  If a group of Middle East Oil rich short sellers all targeted a big company, say J&J, and ran it's share price down to $1, would J&J be any worse off? Would the Feds come in and nationalize J&J just because it's share price was 2% of what it had been?

  It seems to me market capitalization has nothing to do with how a business is doing. And for banks, I thought when people talk about capitalization, they were referring to the amount of DEPOSIT capital they have (cash) which they are allowed to lend out 10 times over.

  How does converting preferred shares to common equity affect a bank's books, other than reduce a periodic dividend payment?

• Report this Comment On April 27, 2009, at 4:51 PM, MKArch wrote:

  http://www.bankstocks.com/ArticleViewer.aspx?ArticleID=5803&...

• Report this Comment On April 27, 2009, at 6:34 PM, eatmeee wrote:

  Sounds like this guy is just another of the vast bank hating crowd! The in thing is bashing big blue chips! Hey, he is ane of the agenda driven bomb throwers. Obvious!

• Report this Comment On April 28, 2009, at 12:06 AM, ZZyzxZZ wrote:

  Thanks for the link MKArch. After reading that and exploring other sublinks, I think I understand what TCE is.

  I also learned that's it's only lately that bank regulators have replaced Tier1 ratios with TCE in evaluating a bank. Who sets the fashion in bank regulations anyways?

  And one part of either the TCE or the Tier1 ratio is the asset side of the balance sheet which includes all the outstanding loans. So the big problem, as always in this downturn, is how to evaluate the value of the loans. All these TCE ratios are just guesses anyways, seems to me, as the value of the mortgage portfolios depend on who is doing the guessing.

  I'm still confused by what actually happened to Bear Stearns and Lehman Bros last year. I know I listen too much to CNBC, but as I recall all the hysteria was about the share price tumbling until the market cap of these firms got so low that regulators shut them down.

  Now if these regulators are letting the markets decide what the assets are worth by using using share price as their substitute for some other evaluation ot TCE, then we are in trouble.

  Terrorism in this century may have been already done on a scale hundreds of times that of 9/11 and without the use of any bullets or explosives.

• Report this Comment On April 28, 2009, at 12:32 AM, TMFHousel wrote:

  MKArch, ZZyzxZZ,

  Thanks for your comments. In response to the link with Tom Brown's criticisms of TCE, I find it amusing that his chief complain is that banks never cared about TCE in the past. That's like saying 30-to-1 leverage wasn't a problem because investment banks had been doing it for years. Banks didn't care about TCE in the past because you could get away with whatever capital structure you wanted provided underlying assets (like real estate) pushed relentlessly higher. TCE became relevant as soon as losses chipped away capital so much that the sustainability of common equity was in jeopardy. And it is.

  Also, if you read Tom Brown's bio provided in the link you posted, you'll find that "He currently runs a hedge fund that invests solely in financial services companies." So .. hmm .. is it surprising that he's against a capital measure that makes the industry he's "solely" invested in look vulnerable?

  -Morgan

• Report this Comment On April 28, 2009, at 9:46 AM, MKArch wrote:

  Morgan,

  To be fair Tom Brown has taken a beating over the last year or so although that doesn't necessarily make him wrong on this point. What is your rebuttal to Warren Buffet questioning TCE?

  I'm not a financial expert but I have been following them for a while and I agree with ZZ, I have not heard a logical argument about why changing the name of the government equity stake from preferred to common and diluting current shareholders in the process makes a damned bit of difference to how the banks operate? Other than saving the dividend payment what has changed?

  Mike

• Report this Comment On April 28, 2009, at 9:50 AM, MKArch wrote:

  I forgot to add Tom's point is not the the banks have not cared about TCE in the past it's that the regulators have not cared about it until certain "investors" that have been betting against the banks started raising it as an issue recently.

  Mike

• Report this Comment On April 28, 2009, at 12:07 PM, ZZyzxZZ wrote:

  MKArch: From what I read, the Preferred shares are counted in Tier1 but not in TCE. So the Preferred shares issued to the taxpayers, has no affect on TCE: It's an asset as it it loaned or sits idle, and a matching liability as it's owed back to the taxpayers.

  Converting to Common shares, it's no longer a liability as it is not owed back to the taxpayers. It goes right into TCE like a new stock offering would. So TCE increases. Of course existing stockholders are no better off as there are now more shares. And the Taxpayer must sink or swim with the future fluctuations in stock price. Deciding what a fair conversion price is of course impossible, as TCE is a guess anyways.

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